De Blasio Plan to Use NYC Pension for Housing Faces Tests

By Martin Z. Braun -
Dec 30, 2013

Mayor-elect Bill de Blasio’s plan to
pump $1 billion of New York’s $144 billion in pension assets
into apartments for poor and working-class residents faces
constraints including competition from banks and declining
federal aid.

Trustees of New York’s five retirement plans have a
fiduciary responsibility to maximize returns for beneficiaries.
That means they can’t provide below-market financing to help de
Blasio achieve his goal of creating or preserving 200,000
affordable units in 10 years, said advocates such as Moses Gates
of the Association for Neighborhood and Housing Development.

A state mortgage agency’s cap on the insurance it provides
for loans funded by city pensions may also limit the potential
benefits of new capital commitments.

“There’s a big difference between adding more market
capital funding sources and adding more subsidy,” said Gates, a
director at the Manhattan-based nonprofit. “In order for it to
generate affordable units, you’re also going to have to add some
kind of subsidy.”

De Blasio, a 52-year-old Democrat, won election in November
vowing to close the growing gap between wealthy New Yorkers who
“enjoy a life of luxury” and the poor and middle class. One-third of the city’s rental households pay at least half of their
income on rent, according to the Rent Guidelines Board. In
November, the median rental price for an apartment was $3,100 in
Manhattan and $2,800 in Brooklyn, according to brokerage Douglas
Elliman Real Estate.

Inclusionary Zoning

Under Mayor Michael Bloomberg, New York financed 50,000 new
affordable units and preserved almost 110,000 others, spending
$5.3 billion in city funds to leverage another $18.3 billion in
private and other government investment. More than 80 percent of
the new units are targeted to households earning 40 percent to
80 percent of the area median income, according to the city
Housing Preservation and Development Department. New York’s
level for a family of four is $85,900.

The mayor is the founder and majority owner of Bloomberg
News parent Bloomberg LP.

De Blasio’s plan calls for building 50,000 new units
through a policy called mandatory inclusionary zoning. Real
estate developers would be required to create residences for
low- and middle-income families in order to build in
neighborhoods rezoned for higher density. Directing $1 billion
in pension fund money to affordable housing would create an
additional 11,000 units over eight years, according to de
Blasio.

More Willing

Since the 1977 passage of the federal Community
Reinvestment Act, which required regulators to assess how banks
have met the credit needs of communities, lenders have been more
willing to target investments in low- and moderate-income areas,
Gates said.

“New market-rate capital is the easiest piece of the
puzzle; the harder piece is the subsidy,” he said.

Affordable housing in New York is subsidized by a variety
of sources, including low-income housing tax credits, tax-exempt
bonds and city, state and federal money.

In fiscal 2012, the U.S. government cut the city’s
allocation of Home Investment Partnership money by 45 percent,
and Community Development Block Grant funds by 8 percent,
according to the city’s Independent Budget Office.

Using pension money to revitalize neighborhoods isn’t a new
idea. New York’s pensions for police officers, firefighters,
teachers, school administrators and civil employees have been
investing in affordable housing and economic development since
1981.

Comptroller Buy-In

The Economically Targeted Investment program had a 10-year
annualized return of 5.85 percent after fees, compared with a
4.52 percent return for its benchmark, the Barclays U.S.
Aggregate Bond Index, according to city records.

De Blasio’s plan requires the support of incoming
Comptroller Scott Stringer, a Democrat, and more than 40
trustees representing public employees and borough presidents.

The comptroller serves as investment adviser to the
pensions, which had $1.2 billion, or 0.8 percent of their assets
in the program, with an additional $424 million committed at the
end of fiscal 2013. The pensions’ target is to have 2 percent of
their assets in the category.

Josh Getlin, a spokesman for Stringer, didn’t respond to an
e-mail request for comment.

‘Reasonable Cost’

The pensions’ biggest investment in that area is the Public
Private Apartment Rehabilitation Program. Since 1982, the city
pensions have pumped more than $850 million into the program,
which offers fixed-rate 30-year mortgages insured against
default by the State of New York Mortgage Agency. Working with
nonprofits and banks, including JPMorgan Chase & Co. (JPM), the
program has financed the preservation or construction of more
than 30,000 units of affordable housing.

“The nice thing about the product is the reasonable cost
of setting the interest rate in advance for the long-term
mortgage that takes out the construction loan,” said Mark Willis, a research fellow at New York University’s Furman Center
for Real Estate and Urban Policy.

“The ability to project debt-service costs in advance has
made it easier to finance affordable housing and helped moderate
the amount of city subsidy required to make the housing
affordable,” he said.

Mortgage Guarantees

The targeted-investment program is subject to the agency’s
capacity to guarantee mortgages, and adding $1 billion in loans
would require additional capacity, said Sadie McKeown, chief
operating officer of the nonprofit Community Preservation Corp.,
one of the lenders. The pension funds are also constrained by
their ability to administer the program, she said. The
comptroller’s office would have to add staff to manage the
additional lending, McKeown said.

In the last four fiscal years, the pensions increased their
investment in the program by an average of about $56 million
annually, according to annual reports from the comptroller’s
office.

Demand for affordable housing and for capital is sufficient
to soak up financing from the pensions, she said. The money
could be used to finance smaller deals that don’t require
subsidies and that might otherwise be ignored by banks, McKeown
said.

“Just to be able to provide capital to smaller owners to
reset their mortgages and fix their rates for 30 years and give
them some money to do renovation of their property is incredibly
valuable,” she said.

Penn South

For example, Community Preservation Corp. is using pension
money to offer long-term financing for the owners of the Dorie
Miller co-operative in Corona, Queens. The co-op, former home of
jazz great Nat Adderley and current home of saxophonist Jimmy
Heath, used the money to restore its façade, repair the roof and
get new boilers to become more energy efficient, McKeown said.

The pensions have also invested almost $600 million in the
AFL-CIO Housing Investment Trust, a $4.6 billion mutual fund
that buys multi- and single-family mortgages. Since 2002, the
trust has invested $800 million in 36 projects to build or
preserve almost 30,000 affordable units. Its biggest investment
was $134 million for the 2,820-unit Penn South co-operative,
which was dedicated by President John F. Kennedy in 1962 on the
west side of Manhattan between 8th and 9th Avenues and 23rd and
29th streets.

The trust expects to invest $250 million in New York
projects next year, creating thousands of union constructive
jobs while allowing it to earn a “competitive return,” said
Ted Chandler, chief operating officer. Chandler, who declined to
name the projects, said they were on a similar scale to Penn
South.

“We’re seeing some large deal sizes and they just appear
to be getting bigger,” he said.